Bahrain: Growth set to be curtailed by fiscal consolidation

3 min
Manfred Stamer
Manfred Stamer Senior Economist for Emerging Europe and the Middle East

Recently released official data show that real GDP rebounded to growth of +2.4% y/y in Q2, after a decline by -1.2% y/y in Q1. The main trigger was a recovery of the hydrocarbon sector which expanded by +0.7% y/y in Q2 after it had dropped by -13.8% in Q1 owing to output cuts stemming from mainte­nance activities at the offshore Abu Sa’afah field. Moreover, activity in the non-hydrocarbon sector picked up to +2.8% y/y in Q2 from +1.7% in Q1. However, average non-hydrocarbon sector growth of +2.3% y/y in H1 2018 was half of the increase posted in full-year 2017 (+4.7%). Meanwhile, Saudi Arabia, the UAE and Kuwait agreed in early October to provide a USD10bn support package to Bahrain which had slid into a financial crisis at the end of 2017 after years of high twin deficits due to low oil revenues (see also our Insight Bahrain). However, the financial aid is likely to be conditioned on strict fiscal consolidation, which will curtail growth in the non-oil sector in the next years. Also in early Octo­ber, a VAT Law was approved by parliament and its implementation was confirmed to be on 1 Janu­ary 2019. Against this background, we forecast full-year GDP growth to decelerate from +3.8% in 2017 to +1.6% in 2018 before slightly picking up to +2% in 2019.